Porter's Five Forces: Complete Guide, Examples & Template

Every business aims to prevent existing competitors from stealing its profits. With the increasing competition in today's business world, it's not a question of if but how...

Porter’s Five Forces is a strategic framework that helps you answer these questions and reduce profit leakage to rivals:

• What forces beyond direct competitors shape your industry?
• What makes your industry profitable?
• Where can you find a profitable and defensible position among your competitors?

You can use Porter’s Five Forces Model to gain a comprehensive understanding of your industry structure and competitive landscape before making strategic decisions.

In this article, we provide an overview of Porter’s Five Forces framework, explain key pitfalls to avoid during industry analysis, give real-world examples of the model, and suggest strategies to create a winning position in your industry.

🎁 Bonus! We also include free templates to help you implement this framework to strengthen your business strategy.

⚠️ Avoid Porter's Pitfall! This framework is a strategic compass, but true value comes from action. Cascade Strategy Execution Platform bridges the gap, turning Porter's insights into actionable plans. Book a call with a strategy expert and see real results from your Porter analysis.

What Are Porter's Five Forces?

Porter's Five Forces model is a strategic framework that helps to identify and analyze five competitive forces that affect a company’s profitability in any given industry.  This framework was developed by Harvard Business School professor Michael Porter in 1979.

These five forces are:

• Threat of new entrants
• Bargaining power of suppliers
• Bargaining power of buyers
• Threat of substitute products or services
• Competitive rivalry

Porter’s Five Forces model is a critical element of strategic analysis that helps companies understand and shape the industry structure to balance competitive forces and maximize profitability. By analyzing the five forces, companies can gain insights into the intensity of the competitive landscape and the factors influencing profitability.

Based on the framework, companies should position themselves where forces are weakest, exploit changes in the forces, and design those forces to their advantage (Porter, 2008).

The Five Competitive Forces

An analysis of all five competitive forces gives you a comprehensive view of the factors affecting industry profitability. When you understand each force, you can formulate a strategy that will allow the company to better cope with competitive forces and increase profit potential. Let's take a closer look at each force:

1. Threat of New Entrants

When an industry starts becoming profitable, it will entice new entrants. If the barriers to entry are low, new entrants can easily capture market share and threaten profitability.

New entrants undercut prices and offer valuable alternatives to what your industry currently provides.

A practical example of a new entry and high threat to existing players is Apple’s entrance into the music distribution industry with the iPod. Apple entered into a new market, stole market share from existing players, and completely changed the way we consume music and audio content today.

On the other hand, if barriers to entry are high, it’s much harder for new entrants to threaten your industry’s profitability.

According to Porter, there are 7 main sources influencing the height of entry barriers:

1. Supply-side economies of scale: High production volumes and low costs per unit force new entrants to start large or face cost disadvantages.
2. Network effect: Buyers are willing to pay more as the number of users grows. Customer brand loyalty and preference for a larger network limit new entrants. Having a strong brand identity can be a big advantage.
3. Switching costs: Higher costs for customers to switch suppliers raise the entry barrier.
4. Capital requirement: High starting capital costs are needed for new entrants. However, if industry returns are high, investors might provide the needed capital.
5. Unfair advantage: Industry leaders have advantages from hard-to-copy resources like patents, exclusive raw materials, strong brands, or favorable locations.
6. Unequal access to distribution channels: New competitors might struggle to enter existing channels. Alternatives include bypassing traditional channels or creating new ones, like low-cost airlines selling tickets on their own websites.
7. Government policies: Policies can influence entry barriers by either raising them through licensing requirements or lowering them through subsidies.

Questions you can use during analysis:

• How expensive and time-consuming would it be for a new competitor or startup to enter your market?
• Is there strong customer loyalty in your industry? Would it be hard for a new competitor to attract your customers?
• Are there additional barriers to entry (e.g. regulation, intellectual property, access to distribution channels)?
• What’s your industry structure? How strictly is it regulated?
• Is your key technology protected?

2. Bargaining Power of Suppliers

Suppliers offer your industry the needed inputs to operate (e.g. components, materials, and services). When the bargaining power of suppliers is high, there’s a strong chance your suppliers could set higher prices for those inputs or reduce quality without retaliation.

If you have a number of suppliers to choose from, their bargaining power is likely low, so you will not have a problem switching suppliers if needed.

As an example, let's take a look at the automotive industry.

Volkswagen Group's suppliers have limited bargaining power due to VW's global presence with suppliers scattered around the globe. Volkswagen also has at least 1 or 2 backup suppliers for each part and can shift demand between them.

On the contrary, many automotive suppliers manufacture only a specific part and are heavily dependent on the industry. These automotive industry dynamics put Volkswagen in a superior position while its suppliers have relatively low bargaining power.

If you don’t have multiple supplier options, there are no substitutes, or switching costs are high, the supplier bargaining power increases, and you will need to rethink your business strategy. Companies facing fewer suppliers or relying solely on one supplier often find themselves at a disadvantage in negotiations.

Questions you can use during analysis:

• Who are your key suppliers?
• How many competent suppliers can your company choose from?
• How many alternative suppliers are available?
• How difficult or costly would it be to switch suppliers?

3. Bargaining Power of Buyers

In Porter's Five Forces model, buyers are your customers. At the expense of industry profitability, strong buyer power can lower prices, pit rivals against each other, and demand higher quality or service.

The power of customers is higher when they are few in number and have many sellers to choose from. Beyond this, if a large portion of a seller’s revenue is determined by a handful of buyers, those buyers will have more power.

Buyer switching costs should also be considered when determining their bargaining power.

In the fashion world, brands like Zara or H&M deal with a lot of bargaining power from shoppers who have tons of choices, from fast-fashion giants to boutique stores. With so many options, consumers can push for better prices, higher quality, and even more sustainable practices. This puts a lot of pressure on brands to keep up and constantly improve their products.

Questions you can use during analysis:

• How many buyers are in your industry compared to sellers?
• Do a few buyers make up most of your revenue?
• What size are your orders?
• How easy is it for buyers to switch sellers?

4. Threat of Substitute Products or Services

All firms within an industry face competition from other industries offering substitute products or services. For instance, a messaging app can replace email, just as an airline's website can supplant travel agents by providing its own ticket booking system.

When buyers can meet their needs with an alternative product or service from a different industry, it limits how high your industry can set its prices. The more appealing the substitute, the stricter the cap on your industry's profits. The threat of substitution is high if numerous substitutes can serve a similar function as your product or service. Conversely, if only a few substitutes exist, the threat is low.

Take the beverage industry, for example. The rise of health drinks is a big threat to traditional sodas. More and more consumers are looking for healthier options, which is creating a growing market for drinks with nutritional benefits, less sugar, and natural ingredients. This change in consumer preferences is shaking up the dominance of traditional sodas and pushing companies to innovate and adapt.

Questions you can use during analysis:

• How many substitute products/services exist in your industry?
• How functionally similar are they to yours?
• What sets your products/services apart from these substitutes?
• Are these substitutes affordable?
• What is the cost for buyers to switch to a substitute? Is it low or high?
• Can you introduce a new product/service to compete with a market leader? If so, what is it?

5. Competitive Rivalry

Although rivals face the same industry forces as you, competitive rivalry is often the largest determinant of an attractive industry because it is influenced by the four previous forces. To capture market share, rivals will compete on price, quality, service, marketing spend, and more.

Intense competition arises when buyers have numerous alternatives, there is little product or service differentiation, and industry growth is slowing. In such a competitive environment, buyers can initiate bidding wars, reducing profits.

When differentiation between rivals is minimal, your product or service may be seen as a commodity, and buyers will make decisions based solely on price. If industry growth is decelerating, existing firms will fiercely compete to maintain their market share.

Just look at the fast-food industry: McDonald's and Burger King are in constant competition to outdo each other. They invest heavily in marketing campaigns, innovative product development, and customer engagement strategies. Whether it’s launching new menu items, offering limited-time deals, or using tech to improve customer service, these giants are always on the hunt to keep their competitive edge.

We've written extensively about VRIO Analysis to help you identify your competitive advantage and transform it into a sustainable competitive advantage.

Questions you can use during analysis:

• What is the number of existing competitors in your industry?
• Who is your biggest competitor?
• What makes your product/service different from others?
• Are there any barriers preventing customers from switching providers? If so, what are they?
• Is your industry shrinking or growing?

Examples of Porter’s 5 Forces

Here are some practical applications of Porter’s Five Forces.

Example in Manufacturing

Porter's Five Forces framework can be applied to analyze the competitive environment of any industry. Here’s an example for the manufacturing industry based on the Deloitte 2024 Manufacturing Industry Outlook.

Under each force, you should evaluate the threat, ranging from low to high. As shown in this example, the most important threats in the manufacturing industry are the high bargaining power of suppliers and very high competitive rivalry.

Example in the Airline Industry: IATA

Consider this example of a Five Forces Analysis for the airline industry, developed and framed by Michael E. Porter for the International Air Transport Association (IATA):

As you can see in this example, there are times when you will need to prioritize and make a decision. If you detect high threats in all 5 forces, think about where you need to focus to make the most impact.

Example in the Music Industry: Spotify

Spotify has revolutionized the music industry and transformed the way people listen to music. However, the competitive landscape is ever-changing, and it's crucial to continually update your Porter Five Forces Analysis to stay informed about shifts in your market position.

In Spotify’s example, the highest threats are:

• Bargaining power of suppliers: music labels and artists hold significant control over licensing agreements and royalty rates.
• Competitive rivalry: streaming platforms such as Apple Music and Amazon Music intensify the pressure on Spotify to differentiate its offerings and retain subscribers.

Example in Retail: Walmart

In today's dynamic business landscape, the retail industry constantly changes with market dynamics and consumer preferences. Even for a dominant player like Walmart, these changes bring both threats and opportunities.

Walmart operates in an industry with intense competition from traditional retailers and e-commerce giants like Amazon. This pressure forces Walmart to innovate, offer competitive prices, and provide a superior shopping experience to maintain its market share.

Example in Transportation: Uber

Uber, the trailblazer in the transportation industry, has revolutionized the way people get around and explore cities. As the industry continues to evolve, it presents a dynamic mix of challenges and opportunities for Uber's growth and success.

Uber faces threats from the bargaining power of buyers (riders). With strong competition from ride-hailing alternatives, traditional taxis, and high car ownership, riders have numerous options to choose from, giving them significant influence over pricing and service quality.

Uber also encounters fierce competitive rivalry, along with the rise of numerous locally-focused new entrants. This dual challenge has the potential to weaken Uber's financial standing and allow regional players to capture market share in their specific areas.

Advantages Of Porter’s Five Forces Model

The advantages of Porter’s model are:

• Insight into Profit Distribution: Organizations can gain a deep understanding of how profits are distributed among the five forces within a specific industry.
• Industry Structure Analysis: It helps organizations comprehend the industry's structure and competitive environment, identifying key players who control and establish the industry's rules.
• Baseline for Evaluation: The model offers business leaders a foundation to assess their company's strengths and weaknesses relative to the industry.
• Comprehensive Industry Overview: It provides a thorough overview of an industry, highlighting critical factors that can impact a company's market position.
• Holistic Strategic Thinking: The model encourages strategists to think comprehensively about industry competition and dynamics, revealing hidden opportunities for investment and growth.

Weaknesses Of Porter’s Five Forces Model  

Michael E. Porter and other experts have identified several limitations and potential pitfalls of the model:

• Superficial Analysis: Insufficient effort to uncover the underlying reasons behind observations can undermine the analysis.
• Stakeholder Engagement: Failing to involve stakeholders during the competitive analysis may lead to avoidable obstacles.
• Purpose Misinterpretation: The framework is intended to inform business strategy, not merely to assess industry attractiveness.
• Scope Definition: Strategies often falter because managers define the competitive landscape too broadly or too narrowly. Additionally, strategists must remain open to the possibility of shifting industry boundaries.
• Innovation Consideration: While some argue that innovation should be a driving force in industry competition, Porter believes that technology and innovations are transient factors and do not alone determine an industry’s attractiveness.

There are also many resources criticizing that Porter's Five Forces model is a static tool. The main argument is that the framework gives a snapshot of competitive forces at a single point in time. However, Porter never stated that these five forces remain unchanged. Strategists have to periodically reassess five forces as well as keep an eye out for creative approaches taken by their new or existing competitors.

TIP: Porter’s 5 Forces model is an outside-in-facing tool that analyzes only external factors that impact a company’s profitability. You can do a comprehensive strategic analysis using additional tools and frameworks, like SWOT analysis, PESTLE analysis, Blue ocean strategy, or Value chain analysis.

📚 Recommended read: 6 Competitive Analysis Frameworks: How to Leave Your Competition In the Dust

How To Apply Porter’s Five Forces Framework?

Using Porter's 5 Forces, you should start to understand the forces that shape your industry. The next step is to identify how your company is going to compete and formulate a competitive strategy.

Ideally, you want to sit in a position where you can balance the 5 Forces and maximize your profit. The key question to answer here is how you are going to achieve a competitive advantage that will put your organization in a winning position.

Porter developed three generic strategies that can be used to create a defendable position and outperform existing competitors. These strategies are cost leadership, differentiation, and focus on a particular niche.

Here’s a quick overview of each:

Cost Leadership Strategy

Cost leadership is a strategy for reducing the costs involved in providing a product or service. You'll maintain healthy margins and profits by running a lean operation and reducing costs across different departments.

Differentiation Strategy

A differentiation strategy focuses on providing a product or service that is perceived as unique and hard to replicate. Buyers won’t find anything like your product or service in the market, allowing you to charge higher prices.

Focus Strategy

A focus strategy looks at serving niche markets better than anyone else in this industry. By deeply understanding your particular customer, you can deliver services more effectively and efficiently than competitors who cater to the entire market.

Pitfalls To Avoid During Industry Analysis

While Porter's Five Forces framework is a valuable tool for understanding an industry, there are common pitfalls that businesses should avoid during their analysis:

• Focusing too much on the present: It's important to also consider potential future changes and trends in the industry and how they may impact the competitive landscape.
• Ignoring complementary products or services: Sometimes, other industries can have an indirect impact on the competition within an industry. For example, the rise of online streaming services has greatly impacted traditional cable TV companies.
• Neglecting company-specific factors: While Porter's Five Forces looks at external factors, it's important to also consider a company's individual strengths and weaknesses when evaluating its position in the market.

Don't Get Stuck In The Middle

Which strategy is your organization working towards? It’s not uncommon for organizations to successfully pursue more than one strategy, especially if your industry is growing and profitable.

However, as industries mature, the companies that are unclear about their strategy often see their profits dwindle. When companies fail to focus their efforts on any one of these 3 strategies they are, as Porter calls it, “stuck in the middle”.

Companies that are stuck in the middle lack the investment and resolve needed to be a cost leader, the unique product offering to pursue differentiation, and the attention required to pursue focus… in the long run, it’s a losing strategy.

If you are stuck in the middle, it’s important to start aligning your company with one of these strategies. Not sure which strategy to pick? Choose a strategy that is hardest to replicate and that is best suited for your company's strengths.

If you’re interested in easy-to-follow methods for identifying your strengths, check out our internal analysis article that covers different tools that can help you in the process.

Interestingly, the idea of focusing on a strategy is omnipresent in the realm of strategic planning.

Whether you’re reading Michael Porter’s Competitive Strategy, Stephen Covey’s 4 Disciplines of strategic execution (BHAG), or Jim Collins’ Good to Great (Hedgehog Concept), keeping an acute focus on one strategy is vital for success.

👉🏻 Get the insights and learnings of your Porter 5 Forces analysis into an execution-ready strategic plan. See how Cascade can help you achieve tangible results.

Porter’s 5 Forces Templates

To streamline your analysis, we've created easy-to-use templates for Porter’s 5 Forces Model.

This free Cascade template is user-friendly, comes with examples to inspire your analysis, and can be tailored to fit your organization’s needs.

The best part is, once you implement Porter’s Five Forces Framework with this template in Cascade, you can track your objectives and goals from the analysis in the same platform. No need to juggle multiple tools and risk losing context!

👉🏻How to use it? Click on this link and create a free forever account in Cascade. That’s it!

While we recommend the Cascade Template, we know some people prefer PDFs. If that’s you, we have a PDF Porter’s 5 Forces Template for you!

As you can see, this is the typical template that is used for this framework. You can download it here and add your organization’s information.

Focus + Strategy Execution = 🏆

Once you’ve gone through analyzing your company’s position with Porter’s Five Forces Model, it’s time to take those learnings and insights and put them into action!

But wait! Before going into formulating your strategic plan, think about the metrics that you want to achieve and start building your plan backward from there. We call this “reverse engineering your business,” and the best part of this approach is that it ensures you’re focused on the metrics that matter.

Once you know those metrics, start crafting the KPIs, projects, objectives, and focus areas that you’ll need to work on to get to those key metrics you set. This is basically the process of creating your strategic plan.

📚 Check out our detailed guide that will take you step-by-step into writing a successful strategic plan!

💡Pro tip: To prevent being “stuck in the middle,” remember to keep your strategy top-of-mind at all times. For example, if you’re looking to pursue a cost leadership position, make sure you create goals focused on cost reduction and growing market share.

One final recommendation from our team of strategy experts: know that you cannot do this alone. Change requires buy-in from your people. Aligning your strategy across your organization can be difficult - it’s even more difficult for everyone to keep strategy top-of-mind.

With Cascade, you can create and execute your strategy rooted in reality to ensure the implementation of your Porter’s 5 Forces Analysis findings and initiatives is successful. You can invite your teams to collaborate and ensure company-wide alignment like never before. You can also leverage integrations to import data from multiple business tools.

Cascade allows you to connect your metrics, initiatives, and investments to your business performance and make better decisions, faster.  

Sign up today for a free forever plan or book a guided 1:1 tour with one of our Cascade in-house strategy execution experts.

FAQs About Porter’s Five Forces

What are the 5 elements in Porter’s 5 Forces? 

The 5 elements in Porter’s 5 Forces are the Threat of new entrants, Bargaining power of buyers, Bargaining power of suppliers, Threat of new substitutes, and Competitive rivalry.

Is Porter’s Five Forces model still relevant today? 

Porter’s Five Forces model remains relevant despite being on the scene for more than 40 years. It has its own limitations and can’t be used as a standalone tool but it’s an evergreen strategic tool that helps strategists make better decisions.

Who developed the model?

Porter’s 5 Forces model was developed and published by Michael E. Porter in 1979. The model was later updated by the author itself in 2008 and published in Harvard Business Review.

What is the difference between Porter's Five Forces and SWOT Analysis?

The main difference between Porter's Five Forces and SWOT Analysis is the fact that Porter's model analyzes only external forces, while SWOT Analysis takes into account both internal and external factors.

Resources:

• Porter, M. E. "How Competitive Forces Shape Strategy." Harvard Business Review 57, no. 2 (March–April 1979): 137–145.
• Porter, Michael E. "The Five Competitive Forces That Shape Strategy." Special Issue on Harvard Business School (HBS) Centennial. Harvard Business Review 86, no. 1 (January 2008): 78–93.